Survey of market expectations

The Bank’s market expectations survey was carried out between 29 and 31 January 2018. A total of 29 agents in the bond market, including banks, pension funds, mutual and investment funds, securities brokers, and licensed asset management firms were invited to participate. Responses were received from 24 market participants, giving a response ratio of 83%.

Highlights
The survey findings suggest that market agents’ long-term inflation expectations are broadly similar to the findings from the Bank’s November survey, whereas their short-term expectations seem to have risen. According to the median response in this survey, participants expect inflation to measure 2.4% in H1/2018 and then rise in the latter half of the year, averaging 2.8% in Q4/2018. Respondents therefore expect up to 0.3 percentage points higher inflation than they did in November. Furthermore, they expect inflation to measure 2.7% in one year’s time and 2.6% both in two years’ time and on average over the next five and ten years, a rise of 0.1.-0.2 percentage points between surveys. The survey indicates that respondents expect the EURISK exchange rate to be 125 in one and two years’ time; i.e., for the near term, they expect it to remain virtually unchanged, as they did in the previous survey, conducted in November.
Based on the median response, respondents expect the Bank’s key rate to be held unchanged at 4.25% for the next two years, whereas in November they expected the rate to rise to 4.5%, in 2019.
At the time the survey was conducted, about 68% of respondents considered the monetary stance appropriate, compared to 59% of respondents in the last survey. The percentage that considered the monetary stance too tight or far too tight was 18%, compared to 27% of respondents in the last survey. About 14% considered the monetary stance too loose or far too loose, roughly the same as in the November survey.

In this survey, the range of responses concerning market agents’ expectations about Central Bank interest rates had narrowed from the November survey, apart from two-year expectations, where the range was wider. For both short- and long-term inflation expectations, the range of responses was somewhat wider than in the last survey.